Overestimating the EU Economy

If the EU were a soccer team, it would not lose games for lack of a game plan or due to inadequate capacity. The problem is that the team as a whole is not playing cohesively, and all of the top players are struggling individually, owing to messy problems at home.

ABU DHABI – The European Commission, the International Monetary Fund, and the OECD predict that, on average, the European Union’s economy will grow by 1.9% next year, a rate that is broadly consistent with the average of 2% expected for this year. But the picture this paints may prove to be overly optimistic, not only because the growth rate itself is likely to disappoint, but also because there is significant downward pressure on the EU’s growth potential beyond 2019 – pressure that, at present, European leaders seem unprepared to counter effectively.

If the EU were a soccer team, it would not lose games for lack of a game plan or due to inadequate capacity. Worth nearly $19 trillion, the EU’s economy remains the world’s second largest, constituting about one-fifth of the global output. The problem is that the team as a whole is not playing cohesively, and all of the top players are struggling individually, owing to messy problems at home.

Over the last year, small steps – such as strengthening the collective financial safety net – have been taken to enhance the EU’s overall capacity to handle bumps in the road. But the economy’s overall architecture remains incomplete. The problems are particularly notable in the eurozone, which is challenged by slow progress on banking union, inadequate fiscal-policy coordination, and political divisions.

And the forces of fragmentation will only strengthen. For starters, populist political parties and leaders are increasingly influential, having capitalized on widespread anxieties about identity and migration, together with frustration with mainstream elites, to win support, and even power, in many countries. But the transition from campaigning to decision-making – whether within parliament or, as in Italy, within the governing coalition – has proved to be difficult for several of the anti-establishment parties, given their lack of comprehensive policy platforms.

Together with the election for the European Parliament scheduled for next year, this added layer of uncertainty complicates region-wide coordination and decision-making, at a time when many policymakers are already preoccupied with the as-yet-unresolved issue of Brexit. As a result, they have even less capacity to dedicate to removing impediments to productivity growth and building a more agile economy capable of responding to rapid technological advances and changes in the global economic environment.

It doesn’t help that Europe’s liquidity environment is also becoming less supportive. Having already slowed its asset purchases, the European Central Bank is set to wind down its massive stimulus program at the end of this year. ECB President Mario Draghi has signaled that an interest-rate hike is likely to follow by the end of his term, in October 2019.

Subscribe now

For a limited time only, get unlimited access to
On Point, The Big Picture, and the PS Archive, plus our annual magazine,
for just $75.

SUBSCRIBE

But while these factors threaten to exacerbate the challenge of fragmentation confronting the EU economy, even a disjointed team can secure a victory if its star players manage to perform strongly enough. Unfortunately, domestic issues that defy simple solutions and constrain both national and European policymaking are roiling many of the EU’s biggest economies – France, Germany, Italy, Poland, Spain, and the United Kingdom.

France is being shaken by the “Yellow Vest” protests against President Emmanuel Macron’s reform agenda. Germany is facing a deep political transition, as Chancellor Angela Merkel prepares to retire at the end of her current term. And Italy’s populist government is at loggerheads with the European Commission over its proposed 2019 budget, which is also based on optimistic assumptions for GDP growth.

As for Poland, its government has embraced so-called illiberal democracy, and is pursuing policies that many view as inconsistent with the EU’s values and vision. Spain’s government, for its part, remains weak. And in the UK, divisions within the ruling Conservative Party are hampering progress toward an orderly Brexit process, precluding meaningful pro-growth and pro-productivity policy initiatives.

With these challenges unlikely to be resolved soon, Europe’s key growth engines seem set to lose steam throughout 2019. Meanwhile, policy efforts to promote the EU’s longer-term growth potential will probably remain the exception, rather than the rule. All of this will happen within an external environment that is less supportive, both economically and financially.

Already, the EU’s export engine is not powerful enough to offset weakening domestic drivers of growth. And yet exports are set to suffer further, as a slowing China undermines external demand. Meanwhile, financial-market volatility is likely to continue, amid slowing global growth, technical vulnerabilities, and the reversal of volatility-repressing monetary expansion, which included ample and predictable liquidity injections by central banks.

So the EU “team” is set to face serious challenges both in domestic play and international competition. But the news is not all bad: technically, the EU has both the game plan and the inherent strengths it needs to perform. The economy has recovered from the worst of the global financial crisis. A lot of work has been done to identify the policy steps required to achieve strong and inclusive growth, reduce financial vulnerability, and stop the erosion of the pillars of longer-term prosperity. And the EU has considerable untapped or underused internal capabilities. Unleashing them in the context of a coordinated strategy could improve the EU’s economic performance and prospects considerably.

Success will require political leaders who are capable of inspiring the public and willing to pursue consistent pro-growth policy initiatives. The longer it takes for such leaders to emerge, the more difficult it will be for the EU to avoid a relegation battle.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers in 2009, 2010, 2011, and 2012. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

I think they are less successful not due to a missing “comprehensive plan” (which btw the ruling class has not had in years either) but due to the elite class pushing back on those levers they do control to make implementation much more difficult.

The Euro-zone is a mess. France and the Euro-zone are continuing to unravel as violent protesters have taken to the street. The Yellow Vest protests which have gripped France have brought the country to a halt. Like the problems in France unrest is growing in several countries such as Italy and Spain both suffering from weak economies and reeling from the inflow of migrants. Add to this Anglea Merkel's declining power in Germany and now we are hearing reports that even the Dutch are concerned about the Islamization in the Netherlands.

The Union is currently made up of 28 countries with Britain on a path to exit and it is important to realize many are hellbent on holding Britain's feet to the fire as a way to discourage other countries from moving in the same direction. Bringing all these different cultures with many languages has always been considered a challenge, the article below questions whether the Euro-zone can endure the coming storms.

The "Elephant in the Room" here is the neo-liberal structure that underpins the EU. This is a cancer that will destroy the EU unless neo-liberal isms are taken down. Delors et al deliberately set out for a neoliberal entity, but it has revealed itself as the single most toxic policy ever considered for any economy; "The worst idea America ever had" according to Umair Haque is Austerity, an integral part of neo liberalism. All vestiges of Austerity must be expunged urgently.

That doesn't stop other dysfunctions, such as the loss of Monetary Sovereignty for Euro nations, denying them control over their own economies and the tools used to manage trouble such as devaluations. The infamous Troika is a punitive force with no saving graces. The IMF is at last recognising the damage it has caused but has not remedied it.

The EU is on borrowed time. Force will not save it, it will just add to the wreck. There is a way out but the whole structure has to be renegotiated. The EU is no way a homogenous entity like existing nations with states, like the USA, Canada and Australia. A big handicap that is gaining strength and set for break up.

To add on to Mr. El Erian's point about 'capable and inspiring policy makers', the people in Europe have to be willing to endure the pain in the short-term for long term gains. There will no doubt be pain, one way or another, simply depends on whether it is for the long-term future.

Europe will inevitably continue to suffer growing pains. And who knows, maybe they will even end up being ahead of the US on this measure. What we need to do is step away, let the process of democracy and free markets kick in. This may hold disruptive protests, maybe sprinkled with varying degrees of violence, but whatever the case, we must let the organic political process create its own functional solutions. Coming from a land where people don't read, watch way too much TV, and are stuck between the arid political lands created by leaders such as Trump and Clinton gives us no authority to advise others. Love you to death Mr El Erian, you are a good man which is rare to find these days, but I disagree with your outlook. Leave them alone, sure it may get messier, but maybe, just maybe they'll finally come up with a solution that is derived from nature not artifice---and I believe that is what the world needs most right now

From the point of view of a ruled-based order, "Overestimating the EU Economy" tells they are way behind. However, once you consider the point of view of the principles-based order narrative "Social Singularity dissolves Climate Change with new ways of leading ( https://medium.com/@gmh_upsa/social-singularity-dissolves-climate-change-with-new-ways-of-leading-560988d6d38 )" they will be way ahead.

New Comment

Pin comment to this paragraph

After posting your comment, you’ll have a ten-minute window to make any edits. Please note that we moderate comments to ensure the conversation remains topically relevant. We appreciate well-informed comments and welcome your criticism and insight. Please be civil and avoid name-calling and ad hominem remarks.

Log in/Register

Please log in or register to continue. Registration is free and requires only your email address.

Log in

Register

Emailrequired

PasswordrequiredRemember me?

Please enter your email address and click on the reset-password button. If your email exists in our system, we'll send you an email with a link to reset your password. Please note that the link will expire twenty-four hours after the email is sent. If you can't find this email, please check your spam folder.